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Why China’s MNI Business Sentiment Weakened Further in February

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China’s business sentiment nudged down

The MNI China business sentiment indicator is a leading indicator that measures China’s current business sentiment and future expectations for the economy. A reading above 50 indicates that the business sentiment is growing while one under that mark suggests that business confidence is falling.

China’s MNI business sentiment indicator contracted to 49.9 in February from 52.3 in January as more companies felt that business conditions had deteriorated during the month. Confidence declined during the first two months of 2016, and the indicator is 5.8% below its level recorded a year ago.

An increase in open market operations and lending activities by the PBOC over the holiday period kept credit conditions loose in February, although firms noted a slight tightening compared to last month’s jump. Meanwhile, most firms continued to report easier access to credit on better terms.

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The road ahead

According to Philip Uglow, chief economist of MNI Indicators, “The absence of the usual monthly indicators of economic activity make judging the trajectory of the Chinese economy difficult over the Lunar New Year holiday. From a business sentiment standpoint, the theme is more of the same; conditions remain subdued as companies weigh a more supportive policy environment with market volatility. The significant fall in activity measures suggests that we’re unlikely to see a jump in economic activity over the festive period.”

Impact on mutual funds

Rising credit and falling interest costs are positive news for the overall business community, as they will spur growth. But the overall slowdown in production and new orders may lead to a decrease in revenues of companies such as Tencent Holdings Limited (TCEHY), China Mobile Limited (CHL), and Taiwan Semiconductor Manufacturing Company Limited (TSM).

China-focused mutual funds such as the Clough China Fund–Class A (CHNAX), the Guinness Atkinson China & Hong Kong Fund (ICHKX), and the RS China Fund–Class A (RSCHX) are invested in the above companies. Thus, their performance may also be negatively impacted.

In the next article, we will analyze the Westpac MNI Consumer Sentiment Indicator.

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